New Gold (TSX: NGD; NYSE: NGD) had to lower its production guidance for the year, and while the market took notice, the company's balance sheet and prospect still look good for the long term.
The company's stock was off 9¢ to $6.33 on 1.17 million shares traded in Toronto on Oct. 30, after the Vancouver-based miner pushed guidance down to 390,000 to 400,000 oz of gold from its previous forecast of 440,000 to 480,000 oz. of gold.
The two culprits in the reduction are its Mesquite mine in California and its Cerro San Pedro mine in Mexico.
Gold production at Mesquite, which sits 70-km northwest of Yuma Arizona, fell compared to last year and is expected to be between 110,000 and 115,000 oz. for the year. The lower number is being blamed not only on mining a lower grade section of the mine, which was expected, but on a variance between the company's modelled grades and what it actually encountered. New Gold said it is moving to a higher grade section of the deposit in the fourth quarter and expects to have its strongest quarter of the year at the mine.
At Cerro San Pedro in Mexico New Gold now expects to produce between 95,000 and 100,000 oz. for the year. The lower number is due to a pit wall movement that resulted in less tonnes finding their way to the leach pad. The company also reported lower recoveries at the mine and is adjusting the leach solution to deal with the problem.
Silver production at Cerro San Pedro is also expected to be less than originally anticipated as New Gold said it will likely tally 1.3 million oz. of silver for the year as opposed to its previous guidance of 1.4 to 1.6 million oz. of silver.
Thankfully for New Gold investors, production at its other two mines, New Afton in southern B.C. and Peak Mines in Australia, are still on track to reach the previously stated guidance of 75,000 to 85,000 oz. of gold and 95,000 and 105,000 oz., respectively.
More good news could be gleaned from New Gold's copper production. The company re-affirmed guidance of 78 to 88 million lbs. of copper for the year and said its copper production for the quarter was up 67% from the same period last year. New Gold produced 23.7 million lbs. of copper for the quarter compared to just 14.2 million lbs in the third quarter last year.
That increased copper production helped keep revenues steady year-over-year at US$196 million. Total gold production for the quarter was slightly off from last year's total, however, at 94,038 oz. compared to the 104,5777 oz. it produced last year.
With gold production falling, all-in costs rose by US$25 per oz. to roughly US$900 per oz., and with production costs rising, it isn't surprising to see net income falling. The company reported a net income of US$12.2 million for the quarter, which was 31% lower than for the same period last year when it managed to generate profits of US$17.8 million.
When spread out across its outstanding shares, that net income worked out to 4¢ per share, which was slightly below a consensus of 5¢ per share.
The number surprised to the upside for some analysts as BMO Capital Markets analyst Brian Quast was expecting earnings of just 2¢ per share.
Quast still labelled the news as "slightly negative" due to the larger than expected reduction to guidance, noting that the beating of his earnings expectations largely had to do with lower-than-expected taxes.
Still, he sees strong value in the company given that it is positioned to do especially well should gold prices recover, while at the same time offering some protection to investors should prices continue to flounder.
"New Gold’s NPV valuation relative to its peers improves as the gold price increases and development projects are accelerated," Quast wrote. "However, the valuation never falls below average, which is not completely surprising given the company’s asset diversification and low political risk."
That leverage to the upside and protection on the downside is, no doubt, one reason for Quast rating New Gold as "outperform" with a $8.50 target price.
With $429 million in cash, the company is certainly in a good position to weather any prolonged slump in metal prices.
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